German Supply Chain Act – balancing the obligation to cooperate with the safeguarding of criminal procedural rights

From a regulatory perspective, the German Supply Chain Act (Lieferkettensorgfaltspflichtengesetz) (LkSG, the Act) is, in many respects, the next big thing. Companies need to be aware of the duties, obligations and challenges as the LkSG entered into force on 1 January 2023. In our ongoing blogpost series (see here) we highlight elements of the LkSG, which we anticipate being particularly challenging from a company’s perspective.

Sections 17 and 18 of LkSG allow the Federal Office of Economic Affairs and Export Control (Bundesamt für Wirtschaft und Ausfuhrkontrolle) (BAFA) to make access and cooperation requests of companies and gives BAFA dual administrative and prosecutorial competency. Here, we provide insight into how companies should navigate the challenges and risks this poses.

Sections 17 and 18 LkSG in a nutshell

Section 17 of the LkSG provides the BAFA with a right to access information and documents, while s.18 LkSG creates a duty on companies falling within the Act to cooperate with BAFA in the execution of its administrative powers. The material scope of these rights is limited to the provision of information, which the BAFA requires for the performance of its duties under the LkSG. Not only may the BAFA generally not abuse sections 17 and 18 LkSG for the purposes of a ‘fishing expedition’, but the LkSG also specifically stipulates that the BAFA should follow a risk-based approach when exercising its competency (s.19 (2) LkSG). With the risk-based approach, the legislator has aimed to restrict the BAFA from merely doing random sampling. In addition, s.19 (2) LkSG should lead to a prioritisation of the BAFA’s investigatory efforts by, for example, focusing on substantiated third-party complaints or on a specific, risk-prone industry on a rotational basis.

The BAFA’s access rights extend not only to affiliated enterprises of companies subject to the LkSG but also to direct and indirect suppliers if the requested information is at the company’s disposal or it has contractual rights to require the supplier to hand over the information. Although the LkSG does not establish a general duty on the part of companies subject to the LkSG to require or procure such information from their suppliers – and companies can resist any requests that may go beyond what they have at their disposal or have a right to call on under contract – some companies may, in certain cases, put into effect contractual audit rights in relation to their high risk suppliers, in order to conduct and implement the risk analysis and management required by the LkSG.

To cooperate or not?

While any entity that is subject to administrative offence proceedings (i.e. quasi-criminal proceedings) has a comprehensive right to refuse to actively cooperate with the authorities, the LkSG creates an obligation on relevant companies to cooperate in administrative proceedings. This creates an obvious tension that is amplified by the BAFA’s powers to carry out both administrative proceedings and administrative offence proceedings under the LkSG. There is a risk that it may be unclear whether a request for information is being made in the context of administrative measures or as part of an investigation into an administrative offence, and so companies receiving information requests should proceed with caution – especially given the potential fines that could be imposed in administrative offences proceedings under the LkSG.

While this tension is not new (similar issues arise in relation to the GDPR and the German AML Act (Geldwäschegesetz)), the LkSG adds an additional layer of friction. S.18 LkSG, in principle, creates an obligation to actively assist the competent authority in carrying out its administrative duties. This obligation not only applies to companies but is extended to their legal representatives (see s.18 sentence 2 LkSG). And any members of management who refuse to cooperate could face an administrative penalty of €50,000. But an obligation on natural persons to actively cooperate, if there is a risk of prosecution for an administrative offence, may undermine (criminal) procedural safeguards. As a result, this obligation must be interpreted to require only a passive obligation of cooperation and tolerance (i.e. a duty to tolerate a BAFA measure, e.g. a raid, rather than a duty to actively assist the BAFA, e.g. to actively provide information). Otherwise, the LkSG strikes at the core of procedural protections, which aim to protect an accused from being forced to actively cooperate in their own administrative offence proceedings. It remains to be seen whether evidence obtained in such a manner will be admissible in fine proceedings.

On the positive side, it is worth noting that with regard to requests for information by the BAFA, s.17 (3) LkSG provides natural persons with a right to withhold information if its disclosure would subject the person or one of his relatives to the risk of being prosecuted for an administrative offence. However, s.17 (3) LkSG does not apply to companies and does not cover access requests for documents.

Navigating this tension

The risk of an unhindered flow of information from administrative proceedings to administrative offence proceedings that could circumvent procedural safeguards warrants a close assessment of each individual BAFA access or cooperation request.

At the outset, companies should evaluate whether the BAFA can establish sufficient cause for an access or cooperation request. In addition to that, notwithstanding the broad scope of sections 17 and 18 LkSG, the principle of legal certainty requires the BAFA to provide clarity by pointing out which information or form of cooperation is required specifically to sufficiently fulfil its request. If the respective request is not clear, a possible course of action could be to consult with the BAFA to establish clarity on its scope.

If the request is evidently disproportionate or disregards procedural rights for the purposes of administrative offence proceedings, either the request itself or, following a refusal of cooperation, the administrative penalty could be challenged in administrative court. Whether to make such a challenge would require careful consideration. Challenging an access request in public administrative court proceedings opens a company’s conduct up to public scrutiny. Although a BAFA investigation may be entirely unfounded, the public could perceive a company’s refusal to hand over information to be nothing short of a breach of the LkSG. In addition to potential reputational damage, whether or not and to what extent a company should cooperate with the BAFA, depends on a wide variety of factors. In each individual case, a company must strategically weigh its level of cooperation against the potential infringement the BAFA is investigating, whether or not that infringement could be remedied immediately and/or how far the BAFA’s investigation has progressed.

While the BAFA is authorised to provide guidance on the application of the LkSG and has already done so regarding material legal questions (ie the risk analysis required under the LkSG, see our blogpost on these questions here), it seems unlikely that it will provide insights into the application of procedural provisions directly related to its own enforcement capabilities.

It remains to be seen, how the BAFA will handle these new powers once the LkSG enters into force. Freshfields will continue to monitor the practical impacts of the LkSG for companies. Watch this space.